Why the multilateral model needs a reboot

Every year thousands of the world’s smartest alumni, from the US and elsewhere, try their luck at graduate programmes offered by blue-chip multilateral lenders. These jobs have a lot going for them: prestige, a good salary, great career prospects and a sense that one is part of an organisation that’s helping poorer nations climb the development ladder. But what if, in reality, such institutions were consistently failing to live up to their mission?

While this sounds like an exaggeration, criticism is growing louder that multilateral banks and development finance institutions are approaching their problem with the wrong end of the stick. The problem is big: by some accounts, emerging markets face an infrastructure financing gap totalling between $1 trillion and $1.5 trillion a year. Yet the G20 estimates that commitments to infrastructure made annually by major development banks come up to about $90 billion, or less than 10 percent of what’s needed. There’s thus only so much DFIs can achieve by solely relying on their balance sheet.

Hence the calls for them to shift focus from lending to mitigating risks. The point was made to us recently by Richard Samans, a board member of the World Economic Forum. It was also eloquently illustrated by a study released last summer by the non-profit, which polled 40 of the world’s largest infrastructure investors on DFIs’ current efforts at risk mitigation. Here are its findings, summed up for us by EBRD chief Thomas Maier:

“Multilateral development banks don’t have the products the market needs, or not enough of them; the skill-sets many have to tackle the issue are deficient. There is also a lack of standardisation of products across the various emerging market regions, making it very difficult for the private sector to use international financial institutions in an efficient way.”

Making risk mitigation tools widely available could do much to crowd in private capital. As Maier contends, development banks should seek to use their war chest to leverage financing not just from commercial lenders, but also from institutional investors. In fact, operational PPPs have in recent years become a favourite of insurers, pensions and sovereign wealth funds. But these invest under much tighter fiduciary rules than banks.
Availability, however, is not enough – risk mitigation tools also need to be appropriate.

Development lenders are aware of their shortcomings and some of them are putting together innovative solutions: the EBRD and MIGA last November, for example, allowed Turkey’s Elazig healthcare campus to raise €288 million via the country’s first green and social bond. Two stand-by liquidity facilities, combined with MIGA’s political risk insurance policy, allowed rating agencies to grade the project two notches above Turkey’s sovereign rating. This made the bond attractive to a group of European, Japanese and Chinese institutions.

Risk mitigation alone won’t plug the world’s infrastructure gap, which is less a useful indicator than a monetary concept. A large part of the $1 trillion annual hole is accounted for by frictions at the procurement level, such as governments’ unwillingness to use PPPs, poor project preparation, lack of proven contractors or skilled advisors. But vast amounts of savings around the globe are standing idle, ready to be invested in bankable projects. Making the latter safer would be the most efficient way to use DFI money.